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William,
Thank you for your response. I value it since you have experience
trading futures and I do not. My responses are given below.
--- In amibroker@xxxx, William Wong <williamwongab@xxxx> wrote:
WILLIAM: > a. the author seems to say that a drawdown of 50% trading
stocks and 50% trading futures have different meaning. It seems to
suggest that a paper loss of 50% on share value is not "real" loss
as you are still holding on to the shares versus futures will be
real loss. I think this is falling into trap of turning a trading
position to an "investment" position in the hope that price will
recover.
RESPONSE: The point I was trying to make is this. Leveraged traders
are at greater risk in situations when stops fail to protect (gap
downs, or a series of limit down days for futures). A 50% gap down
in a stock is a 50% loss for the non-leveraged trader, but it is a
100% loss for a trader margined to the full.
It seems to me that traders who use leverage must, if they are to be
able to survive the once in 100 years flood, have money management
rules that are more "restrictive" than would be necessary for non
leveraged traders.
For example, 2% is often cited as the maximum one should risk on a
single trade. For a non-leveraged trader, there is always the
prospect of a gap down or other event that prevents his stop loss
order from keeping the loss to just 2%. How much could he loose? He
could loose 100% if the stock dropped to zero, but that is very
unlikely. However, gaps of 30%, 50% or 75% do happen from time to
time. So for this illustration I will use 50% gap down. The non
leveraged trader thus could loose 50%. What about the leveraged
trader? In the same situation his loss would be 100%, assuming a
leverage of 2:1. Now one could argue that neither trader would be so
foolish as to put everything into one stock. Fine. Lets say they put
money into 10 stocks, and a terrorist act shakes the market. Then
all 10 might gap down 50%.
It just seems to me that the leveraged trader is more at risk than
the non leveraged trader if stop losses fail to keep losses within
the range the trading system expects. For this reason I suspect --
just a guess on my part -- that the money management guidelines of
2% are "conservative" -- with just the right amount of protection
for leveraged traders and a bit more protection than necessary for
non leveraged traders.
Now I take another step of logic (which could be wrong) and I assume
that since futures are much more highly leveraged than stocks on
margin, the money management rules for futures should be "very
conservative" and thus be considerably more protective than
necessary for non leveraged stock traders.
When all goes as planned (stops work without fail, etc.), then I can
seen how the leveraged and non leveraged trader could use the same
risk rules of say, only risking 5%/trade. But since the risk is far
greater for the leveraged trader if the stops fail, the rule of
thumb is set not at 5%, but at 2%. Just to be clear -- the 5%
figure is just used for illustrating the point. I am not saying it
is a right amount for non-leveraged trading.
>
WILLIAM: > I have traded both stocks and futures for many years. I
find no difference in the way MM should be applied. You can
practice strict MM to both stocks and futures irregardless whether
you are margined or not. The same strategy applies. There are
countless literatures on MM and they don't differentiate whether it
is stocks or futures, margin or not margin.
RESPONSE: If the literature does not different between the
additional risk carried by leveraged traders when stops fall and the
lesser risk of non leveraged traders in similar situations, then it
would seem that the literature is wrong. Or am I overlooking
something?
b
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